Channel Nine’s Disappointing Ratings Force Share Price to Drop 20%

Nine Entertainment Co. [ASX:NEC] shed as much as 25.79% off its share price this morning. Nine hit an all-time low of $1.13 per share. The media company has lost 36.15% of its original share value for the year. And even with programs like ‘Summer of Cricket’ and ‘Reno Rumble’, Nine is floundering.

channel 9 share price 05Apr16


What happened to the Nine Entertainment share price?

This morning Nine announced that its advertising market in the March quarter remained subdued. Nine’s ratings were far softer than anticipated. As a result, their free-to-air ad revenue intake was greatly impacted.

Nine’s Summer of Cricket was adversely affected by both weather and a lack of competition. But the decrease in viewers has left Nine scrambling to come up with answers. Shareholders are eager to know what could be done to improve Nine’s programming.

The FTA advertising market is now expected to record a low single-digit decline for FY16. This is compared to their pervious guidance of flat-to-down-marginally. Nine’s share is now expected to be roughly 37% for the year.

For the quarter, Nine’s revenues were down 11% against Q3 FY15. As mentioned, Reno Rumble also contributed to the disappointing results. The program debuted its second season in March with just 395,000 metropolitan viewers.

Just for comparisons sake, rival Seven’s ‘My Kitchen Rules’ rakes in 1.46 million viewers. What’s more, due of the diminishing viewing numbers, Reno Rumbles time slot will be replaced with ‘Married at First Sight’.

In an interview with Fairfax Media last week, Nine’s chief executive Hugh Marks said:

$700 million of our $900 million cost base is in content. So getting efficiencies in our content spend, making sure we’re spending the right dollars on the right programs is really what the focus is…I’m working with the team that we’ve got to make sure when we launch next year, we’ll launch with a much more competitive set of programming. The plan is certainly to improve.

Are Nine Entertainment shares cheap?

Nine’s share price has decreased dramatically. However, it doesn’t make them cheap. What would make them cheap is if their share price had dropped but yet their financial stated the same. This means only market volatility and pessimism affected Nine’s share price.

Instead, a poor performance for the quarter, along with a shaky outlook, has made them an undesirable investment. Even before their most recent trading announcements Nine’s financials were slack.

Their first-half financials for FY16 showed the media group already struggling. Nine’s profit after tax was down 1% on an earnings per share basis. And they’ve been buying back shares at prices overvalued from their current price now. This was a horrible move by Nine. And many investors tend to gloss over share buybacks entirely.

But for those of us who don’t know, what does a share buyback mean?

A share buyback is exactly what it sounds like. The company buys back shares from existing shareholders. It can be seen as a benefit if management believes their shares are undervalued; it’s a good place to invest shareholders capital.

However, there is always a problem of distinguishing whether shares are undervalued or not. When management performs a share buyback shareholders are usually happy. Why? Because their own share value is likely to be increase through excessive buying.

Yet we must remember that the capital that management is using to buy back shares is from the shareholders themselves. Therefore, if shares are overvalued, it makes little sense to buy any shares as it would be a poor investment for shareholders capital.

And because Nine’s shares have dropped considerably, management has bought shares that are now worth more than 20% less. Is now the best time to buy Nine? Either way, some investors are likely to stick to the adage that you never buy in a downward trend.

Härje Ronngard,
Junior Analyst, Money Morning


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